Apple gives up $900m in deferred revenue to make Mavericks, other software free.

Apple has released its financial results for the fourth quarter of fiscal 2013, and the news for the company is mostly good: it reported $7.5 billion in profit on $37.5 billion in revenue compared to $8.2 billion in profit and $36 billion in revenue in the fourth quarter of 2012. This beat Apple's guidance from last quarter, which predicted revenue of $37 billion for the fourth quarter.

The short summary of this quarter is very similar to the last one: Apple sold 33.797 million iPhones (up from 26.91 million in the year-ago quarter), riding the release of the iPhone 5C and iPhone 5S to a new quarterly sales record. However, its profit margins overall are down from 40 percent to 37 percent.

Breaking out other individual product lines shows that the iPhone was by far Apple's strongest seller, both in terms of total units sold and relative to last year. Macs were down by a little over seven percent, falling from 4.92 million units sold last year to 4.57 million units this year. Apple CEO Tim Cook noted that this beat the 10 percent slump seen in the wider PC industry, but it is nevertheless the fourth consecutive quarter of year-over-year decline for the Mac.

The iPod line also continues its ongoing (and, likely, terminal) decline, selling just 3.5 million units instead of the 5.34 million units of the year-ago quarter. It's worth noting that Apple last released an all new iPod lineup in September of 2012 and didn't change the lineup at all this year. Mac sales have outpaced iPod sales this quarter for basically the first time since the iPod became popular, demonstrating just how far the media players have fallen in the face of modern smartphones and tablets.

That iPod line hasn't fallen below the Mac line in years.

Finally, iPad sales were effectively flat compared to this quarter last year, which Cook and CFO Peter Oppenheimer were actually pleased with—Q4 of 2012 was the second quarter of availability for the third-generation iPad, while both the fourth-generation iPad and the iPad mini were coming to the end of their product cycles this year. Apple seems confident that the iPad Air, the Retina iPad mini, and the first-generation iPad mini's new $299 starting price will help drive sales forward in the first quarter of next year.

Apple's guidance for next quarter is much higher than this one. The company expects revenues between $55 and $58 billion with 36.5 to 37.5 percent gross margins, higher than the $54.5 billion in revenue that the company made in Q1 2013. The holiday quarter is a big one for Apple, and the company expects the new iPads to drive much of that growth. Cook also noted that the company's flagship desktop, the iMac, was effectively removed from sale in the month or so between its announcement and its availability. Combined with the new Retina MacBook Pros, this should drive Mac sales up year-over-year for the first time in several quarters.

One of the more interesting tidbits dropped during the call was the cost of giving Mavericks and the iLife and iWork apps away for free. Apple is giving up $900 million in deferred revenue for those sales, effectively lowering the gross margins on its hardware—the total hit is somewhere between $15 and $25 for iOS devices and about $40 for Macs (up from $20, pre-Mavericks). As has been said many times since last week, Apple's cushy hardware margins are subsidizing its ongoing software development. The company continues to work to reduce its component costs, and margins for Q1 of 2014 are expected to hold even despite the loss of the deferred revenue.

Cook also commented on Apple's supply chain, noting that both DRAM and NAND prices were up this quarter. He expects NAND prices to stay flat going forward while DRAM prices rise and other components steadily decrease in price. On the subject of iPhone 5S supply, Cook noted that there was a "backlog" but was confident that supply was improving and will continue to improve. He was more guarded when talking about supplies for the upcoming Retina iPad mini, saying only that he knew how many Apple would be able to make but that availability for the tablets would depend on demand.

Readers interested in listening to the earnings call in its entirety should watch Apple's Investor page. Apple generally posts these recordings by 5pm Pacific on the day of the call and leaves them available to download for about two weeks.

That's because a large percentage of Android devices are given away like pork tacos at a smorgasboard. Any given month you can see some carrier doing a BOGO on Android phones. Meanwhile, iPhones are never given away unless you count $0 iPhone 4S' for free on contract. Someone who gets an iPhone or any iOS device for that matter is paying for it 99% of the time.

That's because a large percentage of Android devices are given away like pork tacos at a smorgasboard. Any given month you can see some carrier doing a BOGO on Android phones. Meanwhile, iPhones are never given away unless you count $0 iPhone 4S' for free on contract. Someone who gets an iPhone or any iOS device for that matter is paying for it 99% of the time.

Eva01

(In America).(The rest of the world works differently in various ways)

"Apple is giving up $900 million in deferred revenue for those sales, effectively lowering the gross margins on its hardware—the hit is approximated at between $15 and $25 for iOS devices and $40 to Macs (up from $20, pre-Mavericks). "

I think this is a stretch. Any time you give something away, there is a boost in actual sales if the freebie has value. As they say, "you make it up in volume." ;-)

They're describing the P/L impact this way because AAPL reports OS revenue and profit as a part of the same business segment as the associated hardware. Therefore, from analysts' point of view, reduction in OS revenue is indistinguishable from a reduction in hardware revenue without a corresponding reduction in costs of goods sold (i.e., lower gross margin).

Fascinating that in spite of the huge competition from the Android device market, that Apple has been able to keep its profitability as high as it has.

It's not really that fascinating if you think about it. Apple is doing the same thing they were doing 10 years ago: producing high quality consumer electronics. Before the iPad and the iPhone, Apple was competing against all the Windows OEMs - Dell, HP, etc. I don't see Android or Google or Samsung as being any different to Apple than Windows or Microsoft or Dell. As long as Apple continues producing a high quality product, they will do just fine.

What's fascinating to me is that Apple beats expectations and the stock drops. Amazon lost what was it, $41 million, and their stock jumped 10%. Some things I will just never understand...

"Apple is giving up $900 million in deferred revenue for those sales, effectively lowering the gross margins on its hardware—the hit is approximated at between $15 and $25 for iOS devices and $40 to Macs (up from $20, pre-Mavericks). "

I think this is a stretch. Any time you give something away, there is a boost in actual sales if the freebie has value. As they say, "you make it up in volume." ;-)

Sure, but they can't account for that until it actually happens. Whereas they can account for their predicted Mavericks sales no longer taking in $30 per unit or whatever the price would have been.

[quote=nsap]What's fascinating to me is that Apple beats expectations and the stock drops. Amazon lost what was it, $41 million, and their stock jumped 10%. Some things I will just never understand... [/quote]

Amazon are playing the long game - their current strategy is more about market share than about profit.

Wow, 33.797 billion iPhones in a year? That IS impressive, that's 3 for every person on earth.

Don't believe all the usual spin. Flat sales is good?

It is for a quarter right before a product refresh. Typical AAPL stock chart looks like a seesaw of sorts because people hold off buying new iphones/ipads/macs/whatever as it gets closer to a new release.

That's because a large percentage of Android devices are given away like pork tacos at a smorgasboard. Any given month you can see some carrier doing a BOGO on Android phones. Meanwhile, iPhones are never given away unless you count $0 iPhone 4S' for free on contract. Someone who gets an iPhone or any iOS device for that matter is paying for it 99% of the time.

Eva01

If you actually think that "$0 on Contract" or "BOGO on two contracts" is "giving away", I have a bridge I'd like to sell you. Most US consumers are that ignorant, but Ars Readers are supposed to be smarter-than- the-average-bear. Carriers still have to pay a couple of hundred dollars to the manufacturers for each of those "free" phones.

Sooner or later, smart phones will become the "norm" and Apple's high margins will erode or sales will decline, or worse, both will happen. Note that this is already happening with Apple tablets, Apple's newest product line.

The problem I see with the earnings from Apple is that the total revenue was almost even with those from a year ago. That's not good for a company that has typically had double-digit year-over-year revenue growth. Apple needs to open up new revenue streams in the next year or two, else they're going to stagnate (they'll still be profitable, but will no longer have the growth that most investors desire.)

When your profits were sky-high to begin with, you can have quiet a few quarters of profits being "down" while still being in a very comfortable business position. Some will report these numbers as sign of Apple's "fall," but they're doing just fine. And I'm saying this as the owner of a Samsung phone and a Sony laptop, not as an Apple fanboy.

Amazon are playing the long game - their current strategy is more about market share than about profit.

Never mind "current." Considering that they haven't made a dime yet, basically ever, they are definitely not after profit anytime soon. People were waiting for profitability ten years ago and are still waiting. Don't get me wrong, I love Amazon, I'd just never in a million years buy their stock.

Amazon are playing the long game - their current strategy is more about market share than about profit.

Yeah, I guess you could say that. What Amazon's shareholder's don't understand is just how long the long game is going to be for them. Amazon is currently valued at $164 billion. To justify that at a typical retail store P/E of 10:1 they would have to start making $16.4 billion in profit, or $4.1billion per quarter. Now established retailers scarcely ever make a profit that is more than 5% of their revenue (Walmart's profit is 3.6% of their revenue). It just isn't possible- charge a margin bigger than 5% and shoppers will go across the street (this is all the easier on the internet).

So for Amazon to make a profit sufficient to justify their valuation, they will need quarterly revenue of about $82 billion or more. Their most recent quarterly revenue was $17.1 billion, so for their current valuation to make sense they would have to grow their revenue by 480% and then increase profit margins from 0 to 5%. That is, in your words, going to be a 'long' wait. In the mean time, shareholders should worry that any future market shock or even just the boredom of waiting the 'long game' will lead to a more realistic valuation (ie. a stock price drop).

iPad sales were effectively flat compared to this quarter last year, which Cook and CFO Peter Oppenheimer were actually pleased with—Q4 of 2013 was the second quarter of availability for the third-generation iPad, while both the fourth-generation iPad and the iPad mini were coming to the end of their product cycles this year.

Given the short cycle of the iPad3 the only way to compare like-for-like while avoiding seasonal fluctuations would be to look at the Q2 2012 sales of the iPad2 (11798) vs the Q2 2011 sales of the iPad1 (4694).

I always thought, pre-Mavericks, the cost of getting the full Mac suite of software was part of the premium you paid for the computer. I could see the $20 deferred for forgoing the typically $20-$40 upgrade fee.

The lack of features the iPad mini gave shows here with no staying power through the summer quarters. Should be a holiday hit tho.

Let me explain it... a lot of so-called financial/tech analysts have blamed the decline in PC sales on the failure of Microsoft's Windows 8.0 launch.

Now that Mac sales have declined almost as much as well, and since they're also PC's but don't run Windows... Lonyo was pointing out how the "analysts" were so "correct" with their analyses. ;-)

Not so cut and dry as a lot of macs are running windows.

Now a lot of people are going to claim the cause is tablets. But this isn't first time when PC sales have hurt when economy is tanking, and we have the added bane of slowed PC evolution to make new PCs less appealing compared to what people are already using.

The lack of features the iPad mini gave shows here with no staying power through the summer quarters. Should be a holiday hit tho.

That particular iPad Mini didn't have good staying power because even for non-techies it was always hard to overlook the fact that it was built with spare parts and would be replaced by something massively better- it literally had the same screen as the iPhone 3GS from 2009 and the processor of an iPad 2 from 2011. The retina Mini is far more modern and will likely have a different sales trajectory. We shall see.

The lack of features the iPad mini gave shows here with no staying power through the summer quarters. Should be a holiday hit tho.

That particular iPad Mini didn't have good staying power because even for non-techies it was always hard to overlook the fact that it was built with spare parts and would be replaced by something massively better- it literally had the same screen as the iPhone 3GS from 2009 and the processor of an iPad 2 from 2011. The retina Mini is far more modern and will likely have a different sales trajectory. We shall see.

I didn't realize the 3GS had a 7.9" screen and I thought the galaxy mega was huge

Retina Mini still faces the problem of being very expensive compared to the Nexus 7, Kindles etc. Its more attractive for sure but $150 price gap is pretty large.

Fascinating that in spite of the huge competition from the Android device market, that Apple has been able to keep its profitability as high as it has.

I think the reason for this is that Android and iOS are not as much competitors as some would have you believe.

Whilst high end android phones do exist, the vast majority sold are not high end and not comparable to the iPhone.

So the massive sales figures being reported for android have to be taken with a pinch of salt when compared to the iPhone market share. Apple isn't losing iPhone sales to android so much as android is replacing dumb-phones in the low-cost, low margin segment of the market.

So whilst android has higher market share in terms of numbers sold, amongst the users who actually use the phone like a smartphone (purchasing and using apps, browsing the internet, etc.) iOS seems to win out. This is borne out by the mobile browsing stats and iOS App store numbers.

edit:As far as the PC industry goes - sales are flat because there is no compelling reason to upgrade and the world is in a recession. Maybe this will change if/when the next generation consoles take off, but at the moment, even if you're a gamer, not many games are really pushing for hardware upgrades as a requirement to play, because all games are pretty much written to be portable to the 2005-ish spec PS3 and Xbox 360.

If you're not a gamer - well, there's no compelling new application to take advantage of all the CPU power. Previously, MP3 drove upgrades from 486s to pentiums, compressed/streaming video drove upgrades from pentiums to pentium 2 and up, stuff like HD video and maps drove people to core 2s and higher.

Now?

Try and think of something that will NOT RUN on a reasonably specced Core 2 from 2007? The traditional 3-5 year upgrade cycle, that we've had for decades no longer applies.

I'll wager that Amazon will outperform Apple in the next 5 years, unless something happens to Bezos. Amazon really have their act together. Despite Apple sales, I'd not buy their stock.

Agree. Apple has reached the size where the size of potential clientèle is limiting their growth. Unless the world economy makes a sudden up shift and increases world middle class population dramatically one can not expect big growth in apple stock.

The thing is, that is expected. China and India are expected to have half of the world's middle class population by 2030. Incomes have been increasing steadily in Asia for years now and the lower class is expected to be a shrinking thing, especially as many countries manage to infant deaths and are improving life conditions. Granted, no one can account for oil shocks or whatever happens, but Apple have the market to grow.

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ps. If apple stock was a country, it would be officially in recession. This is the third quarter in a row when their earning per stock is down YoY.

They're selling more phones for more money, only at lower margins. Profits aren't the measure of recession, economic activity is, which is increasing within Apple.

A functioning market shouldn't allow an electronics company with 37% profit margin.

That might be true if Apple was producing commodity electronics. So long as they continue to provide a unique experience that is viewed as valuable to their customers, they can keep margins higher than average. The functioning market has been *allowing*, even supporting, "luxury" (or premium, or unique) brands for longer than there have been computers.

I think the reason for this is that Android and iOS are not as much competitors as some would have you believe.

Whilst high end android phones do exist, the vast majority sold are not high end and not comparable to the iPhone.

So the massive sales figures being reported for android have to be taken with a pinch of salt when compared to the iPhone market share. Apple isn't losing iPhone sales to android so much as android is replacing dumb-phones in the low-cost, low margin segment of the market.

Let me explain it... a lot of so-called financial/tech analysts have blamed the decline in PC sales on the failure of Microsoft's Windows 8.0 launch.

Now that Mac sales have declined almost as much as well, and since they're also PC's but don't run Windows... Lonyo was pointing out how the "analysts" were so "correct" with their analyses. ;-)

Not so cut and dry as a lot of macs are running windows.

Now a lot of people are going to claim the cause is tablets. But this isn't first time when PC sales have hurt when economy is tanking, and we have the added bane of slowed PC evolution to make new PCs less appealing compared to what people are already using.

These are factors (recession, tablets, less need to upgrade).* But in addition the prices of some Macs (laptops) are going up or are no longer available. For instance a 15 inch MacBook used to cost $1800. Now, the only 15 inch MacBook Pro available (the retina) starts at $2000. - Apple also discontinued the 17 inch MacBook.

I think the reason for this is that Android and iOS are not as much competitors as some would have you believe.

Whilst high end android phones do exist, the vast majority sold are not high end and not comparable to the iPhone.

So the massive sales figures being reported for android have to be taken with a pinch of salt when compared to the iPhone market share. Apple isn't losing iPhone sales to android so much as android is replacing dumb-phones in the low-cost, low margin segment of the market.

Andrew Cunningham / Andrew has a B.A. in Classics from Kenyon College and has over five years of experience in IT. His work has appeared on Charge Shot!!! and AnandTech, and he records a weekly book podcast called Overdue.